A bonanza for empty rates schemes?

The Supreme Court has given judgment in the case of Telereal Trillium v Hewitt (VO) [2019] UKSC 23. The latest in a long line of rating cases to be considered by the Supreme Court in recent years, this case indicates that even the most unattractive, seemingly impossible to let, empty property is likely to be found to have more than a nominal rateable value if other properties of a similar nature in the locality remain let. An owner faced with such a building may well be considering redevelopment but may either lack resources to carry out the development quickly or wish to wait to see what development is likely to result in the best return. Despite receiving no actual rent for the premises, until such time as a redevelopment that permits the reduction of the rateable value to a nominal amount takes place, it is likely to have to pay empty rates based on a full rateable value – even if the building has been vacant for some considerable time and it has failed to find any tenant willing to occupy them at any rent.

This post considers the background to and implications of the judgment.

Background

The history of Telereal Trillium v Hewitt is somewhat unusual, although the premise of an old and seemingly unlettable building will be familiar throughout the country.

The case concerned the rateable value that should be attributed to Mexford House, a substantial three storey office building in the north of Blackpool which was built in the early 1970s and occupied continuously as government offices from 1972 until 2009. It was vacant on the date that the 2010 rating list came into effect. Notice of the intention to vacate had been given by the occupiers prior to 1 April 2008, the antecedent valuation date for the 2010 list.

The rateable value in the 2010 list was initially set at £490,000. On appeal to the Valuation Tribunal of England, the rateable value was reduced to £1. The Valuation Officer appealed to the Upper Tribunal. The valuation principle was not in question: paragraph 2 of Schedule 6 of the Local Government Finance Act 1988 provides that the rateable value is to be “an amount equal to the rent at which it is estimated that the hereditament might reasonably be expected to let from year to year”. During the Upper Tribunal hearing, the Valuation Officer admitted under cross examination that there was no person in the real world who would have put in a bid for a tenancy of Mexford House on the basis of the statutory tenancy. In reality, the premises were only likely to be of significant interest to public sector occupiers and the requirements of the public sector bodies who might have occupied the premises had reduced. The lack of demand for Mexford House was not because it was obsolete or lacked merit but because demand for such space had been fulfilled by the other comparable properties.

Following that admission, the parties agreed the facts and informed the Upper Tribunal that the case could be determined “as a matter of law upon an agreed basis of fact”. As such, the Upper Tribunal and the courts above have had a very limited question to consider: does the rating hypothesis require that, even though it is agreed there would have been no tenant willing to take the premises, the rateable value should be assessed on the basis of general demand, evidenced by occupation of other, similar, offices? If the answer was “yes”, it was agreed that the rateable value should be £370,000. If, however, one could consider solely whether there was a real world demand for the premises at anything above a nominal rent, it was agreed that the rateable value should be £1. The Upper Tribunal held that the rateable value should be £370,000; the Court of Appeal reversed that decision and held that the rateable value should be £1.

Supreme court decision

The Supreme Court has, by a margin of three to two, reversed the Court of Appeal’s decision and restored the higher rateable value of £370,000.

Lord Carnwath gave the majority judgment with which Lord Reed and Lord Lloyd-Jones agreed. Lord Carnwath agreed with the distinction drawn in previous Lands Tribunal cases between property that is vacant due to a surplus of similar property in the market and property which has reached the end of its economic life and is obsolete stating that “even in a ‘saturated’ market the rating hypothesis assumes a willing tenant, and by implication one who is sufficiently interested to enter into negotiations to agree a rent on the statutory basis”. Lord Carnwath concluded that, in the absence of other material evidence, evidence of “general demand”, based on other similar offices can be used to assess the rateable value.

Lord Briggs and Lady Black disagreed with the majority judgment but the main point of difference was the interpretation of the meaning and consequences of the “highly artificial” agreement that the parties had entered into during the Upper Tribunal hearing. Lord Briggs concluded that the rating hypothesis requires only that someone would take a yearly tenancy but not that that would necessarily be at more than a nominal rent , although he concluded that the occasions where the evidence (or an agreement, such as in this case) shows that there is no demand for the subject property but also shows comparable properties in the locality being let for substantial rents would be very rare. As the minority judgment, these comments have less weight but are interesting to note nonetheless.

It is also interesting to note that there was a general concern about the agreement as to the facts that had been reached during the Upper Tribunal hearing, in particular whether this hampered any exploration of the issues surrounding it. Lord Briggs commented that the valuer was “hamstrung by an improbable agreement between the parties about the complete absence of demand (at more than nominal rent)”.

Implications for developers

This case has confirmed that even apparently unlettable property is likely to be found to have more than a nominal rateable value. If other comparable buildings remain let, it is unlikely that the building will be found to be obsolete and a rateable value based on those comparable premises is likely regardless of the fact that no real tenant would actually be able to be found for the building. In a less buoyant property market, particularly outside of London, older buildings may prove unattractive to tenants who may, in reality, have alternative, more modern, options available at similarly reduced rents. Where redevelopment is anticipated but not yet underway an owner may find it more difficult to argue that it should not pay empty rates based on a full rateable value. This may well result in more owners with buildings of this nature using schemes to reduce liabilities for empty rates. A number of such schemes have been considered by the courts and deemed acceptable although care must be taken to ensure that any such scheme proposed is legally effective and that tax advice is taken to ensure that its use is actually beneficial in reducing the overall liabilities for the premises.

Once a redevelopment is under way, following the decision in Newbigin v Monk [2017] UKSC 14, the owner can seek to have the rateable value reduced to a nominal amount. The Supreme Court unanimously decided in that case that there was no bar to implementing a proposal to alter the description of a property on the rating list to “building undergoing reconstruction” and, as a result, to reduce the rateable value to a nominal amount if the facts, looked at objectively, support such an alteration.

Author: Frances Edwards, senior associate, real estate dispute resolution, London

For more information please contact:

Frances Edwards
Frances Edwards
Senior associate, real estate dispute resolution, London
+44 20 7466 2279
Matthew Bonye
Matthew Bonye
Partner and head of real estate dispute resolution, London
+44 20 7466 2162

Indigestion for landlords: a new acid test for redevelopment under ground (f)

In October, we wrote about the Supreme Court case S. Franses Ltd v The Cavendish Hotel (London) Limited [2018] UKSC 62, concerning a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). Yesterday, the Supreme Court handed down judgment in favour of the appellant tenant. On face-value, the implications of this case seem to be tenant-friendly; however, here we discuss further the commercial implications of the ruling for both landlords and tenants. Continue reading

Landlords’ motives for redevelopment – good, bad or irrelevant?

Today the Supreme Court will hear the case of S. Franses Ltd v The Cavendish Hotel (London) Limited, a case which property litigators have been following closely since last year. The case concerns a landlord’s ability to oppose a lease renewal under the Landlord and Tenant Act 1954 (the “Act”) using ground (f) (redevelopment). If the tenant is successful in today’s hearing, the evidential burden on landlords contemplating redevelopment could increase dramatically. Continue reading

HMRC wins landmark SDLT avoidance case

In a 4-1 ruling, the Supreme Court has found in favour of HMRC in the long-running saga of Project Blue Limited v. HMRC (2018) UKSC 30, to the effect that the taxpayer was liable to pay stamp duty land tax (SDLT) on the amount of financing (£1.25bn) it received under the sharia’h law compliant structure, and not merely on the actual price it paid for the land (£959m).

To recap briefly, the taxpayer had contracted to buy a freehold property at Chelsea Barracks in London from the Secretary of State for Defence for a basic price of £959m and had arranged to finance this, along with anticipated development costs, by using a sharia’h law structure under which it sub-sold the freehold on to a banking group for £1.25bn and immediately leased back the asset on terms that effectively replicated a normal financing arrangement, at the same time taking a right to buy back the freehold in the future once the financing arrangement had run its course.

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TOUCHING THE VOID – Mazars Revisited

Not many outside the business rates bubble will have been following the twists and turns of the Mazars case and its aftermath.  Stripping away the jargon, the Supreme Court decided that each floor in a multi-occupied building should be subject to a separate rates bill even where immediately above or below another floor occupied by the same entity, unless linked by a private staircase or lift.  This is of relevance because especially large floors enjoy a discount, which only applies if all floors occupied by the entity in the building are taken into account.

The Government surprised the rating world by announcing in the Autumn 2017 Budget that legislation would be introduced to restore the practice of the Valuation Office (responsible for setting the rateable values of commercial properties) prior to the Supreme Court decision.

After a consultation process the draft bill has now been published.  In short, once it becomes law (intended to be before the end of the current session of Parliament) floors will be treated as one provided they are occupied (or, if vacant, were last occupied) by the same entity and are “contiguous”.  Contiguous means they either touch or are separated only by a void (e.g. a raised floor accommodating landlord’s services).

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Reasons to be cheerful

It is good practice for a local planning authority to give reasons for the grant of planning permission. Failure to give adequate reasons may be serious enough to justify quashing the permission.

There is a statutory duty to give reasons for the grant of permission for EIA development.  However, even if it is not EIA development, reasons will need to be given where the grant of permission does not follow the planning officer’s recommendation; where the development would not comply with planning policy; and where there is significant public interest in the proposals. The law on the duty to give reasons was summarised and confirmed recently in a Supreme Court case, Dover District Council v CPRE Kent (2017) UKSC 79.

1. Background

2. Supreme Court

3. Comment

 

1. Background

The Dover case related to a planning application for a large residential development in an area of outstanding natural beauty (AONB). Before the local authority granted permission, the planning officer’s report had made several recommendations, including reducing the number of residential units, to reduce the harm caused to the AONB. The report stated that this would preserve scheme viability and retain the economic benefits of the development, which helped to provide the finely balanced exceptional justification needed for causing harm to the AONB. The officer’s report also recommended implementation as a ‘single comprehensive scheme’ to secure those economic benefits (including a hotel and conference centre) and conditions or planning obligations to achieve this.

Planning permission was granted by the local authority without following these recommendations. No reasons were given by the local authority for this departure from the officer’s report.

2. Supreme Court

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Supreme Court ruling on negligent property valuations: Tiuta International v De Villiers Surveyors [2017] UKSC 77

The Supreme Court judgement in the case of Tiuta International v De Villiers Surveyors was handed down at the end of last month. The case involves surveyors valuing a property development, and a lender granting a loan facility to a developer while relying on the valuation.

The Supreme Court held that where a lender, Tiuta, advanced money on the basis of an initial valuation of property by surveyors De Villiers, then Tiuta refinanced the facility on the basis of a second negligent valuation by De Villiers, the liability of De Villiers was limited to the ‘top up’ element of any additional lending.

This ruling has come at a time when valuation negligence is a hot topic in the courts. There is an increased frequency of claims, often being tied to the financial instability of the late 2000s and its effect on commercial real estate values.  In recent months, other important issues such as the width of the margin for error in valuation, have come under scrutiny.

For more information on this case please click on the link to the HSF insurance blog post, below:

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Black Wednesday for M&S as it loses Supreme Court Battle…

The Supreme Court unanimously rules that, in the absence of express wording in the lease, Marks and Spencer is not entitled to an apportioned refund of rent and other charges after it had exercised a break clause in its lease

The Supreme Court has today (2 December 2015) handed down its long-awaited judgment in the showdown between Marks & Spencer (M&S) and its former landlord of head office premises in Paddington. The question was whether, absent express wording, M&S could claw back around £1.1m in apportioned rent and other charges, after it had exercised a break clause in its lease which took effect part-way through a rent quarter.

The Supreme Court has now definitively confirmed, much to the relief of landlords across the country, that particularly where the parties have entered into a full and professionally drafted lease, it would be wrong for the Court to attribute to a landlord and a tenant an intention that the tenant should receive an apportioned part of the rent payable and paid in advance.

1. Re-cap of the story up to today …

2. Issues for the Supreme Court's consideration

3. The Supreme Court's judgment in detail

4. Practical pointers

 

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Bad Bargain? Bad news! Says the Supreme Court

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The Supreme Court has ruled that tenants will not necessarily be saved from bad bargains even if service charge provisions require them to pay sums well in excess of the landlord's actual costs.

Arnold v Britton and others [2015] UKSC 36 concerned the interpretation of service charge payment clauses in 25 long leases of holiday chalets in a leisure park. The clauses varied slightly, but all required the tenant to pay a fixed annual sum for services, rather than the cost of those services, as might be more common in a commercial lease. The problem didn't lie in the payment of the original fixed sum of £90 per annum, more that this would increase at a compound rate of 10% every year after the first year of the 99 year term, or for some leases, every three years. Applying that interest calculation, the annual service charge payable by some tenants in 2015 was £2,500. By term end in 2072, the annual amount due for very modest services, where the chalets could only be used for six months of the year, would be an enormous £550,000.

By a four to one majority, the Supreme Court refused to rewrite the bargain that the parties had entered into when they signed up to the leases between the 1970s and 1990s. Whilst recognising that the consequences of the clauses which at first sight seem fairly innocuous could be catastrophic for the tenants, the Court ruled that the clauses were clear and unambiguous enough so that their natural meaning was not in doubt. The Court's role was to interpret the contract, and not to correct it. The leases were granted at a time of significant and spiralling inflation. In that context, an objective reading of the lease showed that the parties had chosen a fixed sum with fixed annual increases. It was inferred that the tenants would have known on the first day of the lease term what the payments would be going forward, and indeed, benefited from that low rate in the early years of the term. Equally, the Court concluded that the landlord had accepted the risk that, should inflation continue at the prevailing rates, he may not recover the full amount that he might spend in providing the services he was obliged to.

The case shows how difficult it is to unravel any contract once it has been entered into. These tenants, and those in a similar position, will be bound by their leases, unless they can agree a surrender or variation with their landlords, both of which can only be negotiated with the landlord's agreement. Landlords will obviously be in the strongest negotiating position. Parties who find themselves in similar situations could consider whether the document reflects their intention at the time of entering into the contract, and, if not, whether a claim of rectification could be brought. They might also consider whether any misrepresentations were made by the other party to the contract which they relied on when entering into the contract. This might give rise to a claim in estoppel or for misrepresentation. Finally, parties to contracts where there are unexpected consequences could also consider whether they were properly advised by their legal or other representatives of their potential liabilities when they entered into the relevant contract, and whether there is any potentiality for a claim in professional negligence.

For more information please contact Matthew Bonye or Rhian Arrenberg at Herbert Smith Freehills.

Matthew Bonye
Matthew Bonye
Partner and Head of Real Estate Dispute Resolution, London
+44 20 7466 2162
Rhian Arrenberg
Rhian Arrenberg
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 2594